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Economy in Brief

Globally Money Growth Cools But Still Runs Strong
by Robert Brusca  September 27, 2021

Global money growth trends surge then cool
Money supply in the EMU is relatively firm over short horizons. However, it is weaker over three months and over six months than it has been over 12 months, two years, and three years. Even so, the rate of change in speed over any horizon is, as of yet, not very remarkable. When growth is measured in real terms, the slowing in the EMU money growth is much more significant with the recent 12-month growth at 4.7% compared to a 6.9% pace over two years and 6.3% over three years.

We see the same sort of thing in progress when looking at credit growth in the EMU. Credit to residents and private credit growth register growth rates of around 3% over two years and three years. Over 12 months that shifts slightly lower to 2.3% to 2.4% then over three months growth rates slip again to 2.1% and 2.2%. There is slightly more step down of note in nominal credit trends (largely because the growth rate as so low to begin with) in the EMU than for nominal money trends (looking at two to three years vs. 12 months). But when credit growth is expressed in real terms, two- and three-year trends report growth rates in the 1.5% to 2% range while shorter growth rates (three-months, six-month, and 12-month) all show negative rates of expansion. Real credit is imploding in the EMU while nominal credit seems to be cruising at a steadier pace with only a modest deceleration. The notion of a steady pace is an illusion and potentially this is a conundrum for policy as inflation begins to flare above target.

However, for the monetary center countries in the table, the results are generally different than they are in the EMU. The United States, for example, shows a relatively sharp slowing in both nominal and in real money balances as does the United Kingdom and Japan. In the EMU, only the real flows show deceleration.

There are differences between nominal and real decelerations with the U.S. showing a more striking nominal and real deceleration than the EMU, with the U.K. showing a more striking real deceleration and Japan showing slightly more striking nominal than real decline. Still, the U.K. and Japan are more like the U.S. as they show more substantial declines in the growth rates for both real and nominal money balances while the EMU shows very little decline in nominal money growth rates.

Nominal 12-month money growth rates since the year 2000 still rank in the 75th percentile for the EMU and rank even more strongly in the 93rd percentile for the U.S., and for Japan. The U.K. money growth ranks below its median in the bottom 37th percentile of its historic queue of growth rates. In real terms, EMU money growth ranks in its 54th percentile (just above its median since the year 2000), the U.S. at its 83rd percentile (still quite strong but not quite as hot as for nominal growth), while the U.K. at its 51st percentile and Japan at its 89th percentile (retaining most of its relative nominal ranking even when expressed in real terms).

Real and nominal trends decelerate

Credit growth in EMU decelerates
EMU also shows weakening credit growth. While interest rates in the EMU are still very low and inflation is now running too hot, credit is not showing any sign of overheating. Credit growth has backed off. All the monetary stimulus and low rates of interest that the ECB has used to try to generate recovery and growth have not translated into more credit growth. Real credit growth in the EMU ranks in the bottom 25th percentile of its queue of growth rates since 2000 and credit to residents ranks at its median at the 50% mark. Maybe monetary stimulus has staved off money and credit implosion, but it has not generated much real and lasting stimulus.

That probably means two things. It means that all these efforts haven't stimulated the demand for real investment very much in the EMU. But it also means that inflation expectations have not risen to the point where people are willing to borrow funds knowing they can pay them off with cheaper inflated euros later on.

This has been the blessing and the curse of the global economic environment. Now with the virus and with so much global slack and with competition from low wage China and other Pacific Rim countries, the opportunities for investment in the higher wage, higher income and higher cost Western nations has become more limited and perhaps specialized. At the same time, this competition has helped to cap prices and to forestall inflation. However, we are currently in the midst of an inflation breakout that central banks are united in calling temporary. But as central bankers issue more forecasts, ‘temporary' is beginning to get to be a longer and longer period of time. One thing seems clear: that is that monetary stimulus is having a very hard time getting traction and creating the improvement that it seeks to achieve.

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